Leisl L. Cording, CFP®, CDFA®
Senior Vice President & Financial Advisor
There are some important steps to take at the mid-year point to ensure you can end 2021 in the strongest financial position possible. The item on that list that probably strikes one of the biggest pangs of financial fear into the hearts of many people is, you guessed it – taxes.
Doing a dry-run of your taxes now is important because you’ll have a much better sense of your tax bill for 2021. One way you can do this is to use our 1040 Tax Calculator to estimate your expected tax bill. If you’re on track to owe more than you’re currently withholding from your paycheck or paying In estimates, or if you’re withholding enough or too much and you’d prefer to put more of your money to work for you instead of paying it in taxes there are adjustments you can make right now.
Here are some strategies to consider to help lower your tax bill come next April – and keep you from having to write a big check to the IRS or getting a big refund...
Tax Savings Strategies to Consider
Although your tax picture is unique to you, there are strategies to consider and discuss with your financial and tax advisors that can help to lower your tax liability and even help you to save and invest more along the way. Here are some of the most common:
- Minimize taxable income while saving for retirement: If you are an employee and your company offers a retirement plan like a 401(k), you can make contributions to your retirement plan with pretax dollars, thus reducing your current taxable income and, likely, your current-year taxes. If you do not work for a company that offers a retirement plan, you can still reduce current-year taxes by making a tax-deductible contribution to an IRA, if you qualify. If you are self-employed, you can use a Keogh, SEP (Simplified Employee Pension), or SIMPLE (Savings Incentive Match Plan for Employees) plan to shelter income.
- Maximize deductions: There are everyday expenses that can be deducted on your tax return. Some examples Include medical and dental expenses, mortgage interest up to certain thresholds, charitable donations, casualty, disaster, or theft losses. Today's standard deduction is typically more than the average taxpayer’s itemized deductions, however if there are years where you can bundle deductions, for example If you have a big medical expense and make a charitable donation, it may save on taxes.
- Consider charitable donations: Depending on your specific tax picture, charitable donations could provide a good source of income tax deductions. One tax-saving strategy is to donate appreciated property or property that increased in value. You can take a deduction for the fair market value and avoid capital gains tax on the sale.
- Review interest expenses: If you pay interest that is not tax-deductible (e.g., interest on auto loans or credit cards), consider paying off the debt.
- Review social security benefits: If you collect social security, you may benefit from strategies to reduce or defer taxable income. If your nonsocial security income exceeds certain levels, it triggers taxation of a higher percentage of your social security benefits.
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- Pay attention to record keeping: Keeping complete records may help you save on taxes, especially if it prevents having to locate or recreate information.
- Review Form 1040 for missed tax opportunities: Reviewing your 1040 could help you spot opportunities for making investments that provide greater after-tax savings. Pay special attention to the Taxable Interest, Tax-Exempt Income, and Dividend Income sections of the form.
- Municipal bonds: Tax-exempt municipal bonds are an excellent taxadvantaged investment, especially if you are in a high income tax bracket or have moved into a higher tax bracket after a promotion or career change. Interest earned on municipal bonds is exempt from federal income taxes and, in most states, from state and local taxes for residents of the issuing states (although income on certain bonds for particular investors may be subject to the Alternative Minimum Tax).
- Plan capital gains and/or losses: Determining when to recognize capital gains or losses depends on whether you want to postpone paying taxes (by postponing recognition of gains) or recognize capital gains or losses during the current year. If the gains will be subject to a higher rate of tax next year (because of a change in tax bracket), or if you cannot use capital losses to offset capital gains, you may want to recognize capital gains this year.
- Review IRA opportunities: If you want to maximize the timing and amount of IRA distributions as long as possible for your heirs, understanding IRA rules is critical. If you are retiring or changing jobs, consider rolling over the assets in your company’s pension and 401(k) plan to an IRA. If you have a traditional IRA, evaluate whether it would be beneficial to convert it to a Roth IRA.
- Estate planning strategies: Review and update your estate plan to minimize potential estate and gift taxes.
- Life insurance: Life insurance may provide liquidity to pay estate taxes and could be an attractive solution to other liquidity problems, such as family-owned businesses, large real estate holdings, and collectibles. Life insurance proceeds can pass free of income and estate taxes when structured properly.
These are just some of the most common tax planning strategies to consider, and each should also be considered within the context of your overall financial picture and goals, not just with regard to next year’s taxes.
We can work with you and your tax professional to review your current situation and determine which tax-saving strategies may be beneficial to you, while also devising a long-term strategy to meet all your financial life goals through our Plan Well, Invest Well, Live Well™ process. Contact us to get started on building your personalized strategy today.
Presented by Vice President, Associate Financial Advisor Leisl L. Cording, CFP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com (http://www.whzwealth.com).